The argument that the Asian economies, particularly the Indonesian economy, is decoupled from the U.S. economy is not true. The Indonesian financial market is very much influenced by the U.S. financial crisis relevant to the subprime mortgage problem -- albeit indirectly.

The Indonesian capital market has gone down around 35 percent since the beginning of the year, the rupiah value is depreciating and the bond price is under strong pressure, as portfolio investors are leaving Indonesia.

It is true that growth is relatively high at 6.4 percent for the second half of the year, but growth could be threatened by a further declining in commodity prices. It is fortunate that Indonesia's financial institutions do not have significant exposure to falling financial institutions in the United States.

Domestically, demand side is still quite strong, supported by high credit growth of more than 30 percent. However, most banks are experiencing tough times on the liquidity side -- some banks even offering a deposit rate of up to 13 percent, based on the deposited amount.

The growth of third party funds is only around 11 percent. With this situation the banks will soon need to slow down credit growth in line with the third party fund growth. In addition, high inflation, at least until the middle of 2009, is eroding purchasing power primarily for lower income groups which also will contribute to a reduction in consumer credit.

BI as the monetary authority cannot satisfy only one side of the business sector, especially the financial market's push for BI to be more aggressive in raising the interest rate in order to curb inflation and maintain a stable rupiah. BI seems only willing to increase the interest rate 25 bp, probably two more times in its monthly board meetings.

On other hand, BI has to take some measures to ease liquidity tightness in the banking sector. This seems contradictory to BI's main mission which is to check inflation, but this is the tenuous job BI has to undertake in uncertain circumstances -- not to mention the pressure from domestic businesses and politicians for BI to not raise the interest rate.

The decline in commodity prices on one side hurts the capital market and it could reduce export revenue and thereby reduce growth. So far, despite the sharp decline in share prices of commodity companies, their balance sheets remain strong. If commodity prices decline sharply, this would also affect domestic banks as their exposure in corporate credit is primarily to commodity-related companies, mainly CPO and coal.

However, on the other side declining commodity prices could help to ease inflation pressures. Again the challenge for policy makers is how to reconcile conflicting conditions.

So far both monetary and fiscal authorities have done a good job in keeping the situation from getting even worse. Certainly there is criticism that BI is behind the curve in fighting inflation, and the Finance Ministry is not aggressive enough in propping up the sluggish bond market.

However, this needs to be kept in perspective given these uncertain conditions; externally there are financial institutions falling in the United States, and internally there is domestic pressure from various interest groups, and so the authorities have to be able to pursue a policy that at least keeps things from getting worse while balancing different interests to facilitate economic growth.

We cannot expect there to be a major move from the authorities. BI would not intervene through a large injection into the currency market or to increase the interest rate aggressively in order to maintain the rupiah value at a certain level if external pressure continues. This is too risky. BI might allow the rupiah to slide down beyond 9500 to the U.S. dollar while avoiding high volatility.

Similarly, the Finance Ministry will not buy back bonds to stabilize the bond market. It has done that sufficiently before, and no further intervention in the bond market is required. As the demand for sovereign rupiah bonds is sharply declining, the Finance Ministry prefers to raise loans from multilateral agencies rather than by issuing bonds. Regardless, there is still a significant amount of budget to be disbursed so there is no financial pressure.

For the time being, Indonesia's economic condition is very much determined by how the U.S. subprime mortgage crisis unfolds. The positive scenario is that by the end of the year things will be sorted out.

If this is the case the Indonesian economy would reap the benefit for its financial market in general. If things in the U.S. become worse with more financial institutions falling and if the measures taken by the U.S. authorities are not effective, the Indonesian economy could also be hard hit.

It seems there is not much to be done by the Indonesian monetary and fiscal authorities as our economy is very open to the global economy. Nevertheless, there is still an important domestic job which is to tackle the serious problem of fighting inflation. If monetary and fiscal authorities can manage inflation well, investors will not be too worried about the Indonesian economy.

Lower inflation means a stronger rupiah and a higher bond price. Lower inflation has to be achieved through a combination of monetary policy by raising the interest rate and by solving the problem of supply, distribution, and transportation primarily for basic goods. Lower inflation also benefits the lower income group by restoring their purchasing power.

Umar Juoro is Chairman of CIDES (Center for Information and Development Studies), and Senior Fellow at the Habibie Center.

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